As a former Executive Director of the World Bank I know that the columnists of the Financial Times have more voice than what I ever had, and therefore they might need some checks-and-balances.
Currently, having probably trampled some delicate ego, I am a persona non grata at FT.
Would the child shouting out “the Emperor is naked” have his observation published in FT? Would the child now need a PhD for that?

Of course, when it comes to assigning financial resources to mitigate or combat climate change, the rich countries have more to give. But I would always hold that the starting point of all these efforts must be that the poor and the rich, as humans, have an equal right to participate in fighting anything that threatens humanity… and that the right and duties of the poor are not lesser because they are poor.

Let not a divisive rich-poor political discourse take over the climate change debate, like in Copenhagen.

PS. Narendra Modi would benefit from understanding that bank regulators' credit risk aversion is much worse for the opportunities of India to develop than any coal aversion by self appointed climate change regulators.

As is, current bank regulations that so much favor what is safe from a credit risk point of view, usually what already exists, over that which is risky, usually that of which the future is built of, is as a powerful blockage of innovations that one could think of.

In this respect, bank regulators would no doubt be declared winners of any denovation prize, if it existed. They would in fact be the unchallenged denovation champs ever since Basel II of 2004, most probably, no certainly, already since Basel I of 1988.

Tett writes: “We have Anthony Bourdain, the famous chef, standing in a kitchen, describing how a CDO is similar to fish stew (bankers resold old mortgages by mixing them up into fresh broth, just as chefs conceal old fish by turning it into soup). We also see the actress Selena Gomez elaborating the principles of synthetic derivatives while sitting in a casino, placing chips on a table, as groupies mimic her bets.”

Myself, as an Executive Director of the World Bank, in a formal statement I delivered in October 2004, have also done my fair share of warning writing: “We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions”. And in January 2003 in FT I had warned about allowing credit ratings to become a systemic risk.

November 27, 2015

Sir, I refer to Martin Wolf’s “The fantasy of Britain as ‘most prosperous economy’” November 27. Of course it is a fantasy! There is an obstacle to that. Though in truth, that is an obstacle for most economies becoming or remaining prosperous. And I refer of course to the risk-weighted capital requirements for banks.

Our society lends the banks a lot of explicit and implicit support. And then regulators, on behalf of the society, now allow banks to leverage that support many times more on their equity for assets perceived as safe from a credit point of view than for assets perceived as risky.

And, since being perceived as safe from a credit point of view, has not one iota to do with whether that credit is more important for the real economy than a credit awarded to someone perceived as risky, the result is pure distorting credit-risk aversion.

The problem is that too many are incapable to understand how dangerous those distortions are. For instance Martin Wolf, with respect to these capital requirements once explained to me: “there is no coercion: if the risks are high, [banks] should not, in their own interest, make the loans. Nor is it the case that risk weighting prevented banks from lending to small enterprises. The reason that they did not (and do not) do so is that it IS ACTUALLY risky to do so, relative to the perceived return.”

It is there, right in front of him, and yet he does not see it. If banks could leverage as much when lending to these “actually risky” than what they are allowed to do when lending to “the safe”, then their perceived risk adjusted return on equity would be much higher and they might indeed lend to the risky.

But no! That leverage advantage is only awarded to “The Safe”, those who already get lower interests, those who already get much larger loans, those who when they turn out ex-post to be risky, are precisely those who cause major bank crisis.

Downgrading… depending on whether it crosses some regulatory thresholds, could mean banks are required to hold more capital against loans assets so affected. Were it to happen, this could, in a pro-cyclical fashion, only help to increase the resulting problems.

And what would usually trigger such a credit degrading? Mostly some unexpected events, like in this case the arrest of BTG Pactual’s chief executive, André Esteves.

And this evidences, for the umpteenth time, the dangers with using ex ante perceived expected credit risks to define the capital banks should hold against unexpected losses.

When the outlook is rosy and so many could be perceived as safe then the capital requirements go down, so bank can leverage even more, so bank can give even more credit, and everything will look even rosier.

When the outlook is darker and many could be perceived as risky, then the capital requirements go up, so bank can leverage less, so banks have to contract the credit they have awarded, and so everything will look even darker yet.

Regulators fill their mouths with sophisticated remarks about the need of countercyclical regulations but manage somehow, with a little help from silent FT, to avoid being held accountable when they design pro-cyclical nonsense.

Sir, I refer to FT’s Special Report “Managing Climate Change” November 27.

If a bank is allowed to hold less capital against Good assets than against Bad assets, then the bank will be able to earn a higher risk adjusted return on equity on The Good than on The Bad. And then banks will lend more, and on better terms, to The Good than to The Bad.

Currently bank regulators have defined The Good to be those whose perceived credit risks are lower than that of the Bad. That is dumb, serves no purpose and is unjust.

Dumb because banks, by mean of interest rates and size of exposures already clear for credit risks, and so perceived credit risk gets to be considered excessively, which is something that seriously distorts the allocation of bank credit.

Purposeless because perceived credit risk has nothing to do with the usefulness for the economy and the society of a bank credit being awarded.

Unjust, because by favoring more than ordinary the access to bank credit of those perceived as safe, impede those perceived as risky to have fair access to the opportunities that bank credit provides.

Could that happen? I am not sure. That requires many to understand what the credit-risk capital requirements for banks have done to our real economies, and that is not a pretty sight bank regulators likes the world to see.

Sir, would it not be nice if suddenly banks earned higher risk adjusted returns on equity doing something we like them very much to do? Of course it would. Hey, we could perhaps even see some huge bank bonuses paid in a quite very different light.

November 26, 2015

Sir, Martin Wolf insists again in that the government should take advantage of very “favourable terms” to borrow so as to invest [in infrastructure]. "The same destination but a gentler route" November 26.

Again Wolf simply cannot understand (or does and turns a blind eye to it) that those “favorable terms” do not come cheap.

The low interest rates result much from favoring the government’s access to bank credit over that of the private sectors, and especially over that of those perceived as risky, like SMEs and entrepreneurs. Therefore its cost is a road littered by private initiatives that never got the bank credit these needed to be tried out. Our young, who forever will see their employment opportunities seriously diminished by this, will, when they discover what has been done, not look favorably on those responsible for it, and on those silencing it.

To think, as Martin Wolf obviously must do, that a government bureaucrat is more capable of efficiently using bank credit that he is not personally responsible to repay than citizens, can only be explained from an ideological point of view. He surely must be a statist, one of those who want austerity to be imposed on banks, but decries it when it touches the government.

Does that mean I disapprove governments investing and financing infrastructure? No! But, when evaluating projects, governments should not use the currently subsidized public borrowing rate as their reference.

Sir, Rick Lacaille, of State Street Global Advisors concludes with “Only a globally harmonised approach — where regulators and asset managers work together to scrutinise and overcome issues linked to systemic risk — will assure global financial stability.” “Regulators must keep tabs on twin risks of leverage and liquidity” November 26.

I find myself on exactly the opposite side. In 1999 in an Op-Ed I wrote “the possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

Let me just here quote from a list of regulatory mistakes, some relevant principles that are ignored by the current meddling scheming regulators. These are in much perfectly applicable to regulations of asset managers.

To allow bank equity to be leveraged with net margins of assets differently, distorts the allocation of bank credit.

The scarcer the bank capital is, the greater the distortions produced by the risk weighted capital requirements.

The safer something is perceived the greater is its potential for unexpected losses.

The risk of a bank has little to do with perceived risk of assets, and much to do with how the bank manages risks.

Any perfectly perceived risk causes the wrong actions if the risk is excessively considered.

The undue importance given to few information sources, credit rating agencies, introduced a serious systemic risk.

Regulators ignored that imposing similar and specific regulations on a system stiffens it and increases its fragility.

Any regulatory constraint that can be gamed will be gamed benefitting those gaming the most, in detriment of other.

Lacaille writes: “In our view, leverage should remain the guiding indicator of systemic risk. Regulators particularly need to look for managers that operate leveraged strategies, with a focus on identifying and closing loopholes for disguised leveraging.”

The best way of avoiding disguised leveraging is of course not allowing the costumes. One simple capital requirement for all assets would be the most transparent and the least risky way to go.

Will that lead to more risk-taking? Yes, but not to excessive systemically important financial exposures to what is risky. The dangers will, as always, remain being that of excessive financial exposures to what ex ante is perceived as safe, but that ex post can turn out to be risky.

November 21, 2015

Sir, I refer to Tim Harford’s discussion of taxes from the perspective of economists, “The pillar of tax wisdom”, November 21.

If companies could like governments print money so as to repay their debts with money worth less, or if companies, like governments do when they increase taxes, could when in need force shareholders and strangers to pay in additional equity to help repay its debts, then companies could be as “good-credits” as governments.

In 1988, the overall important G10, with the Basel Accord, sprang the risk weighted capital requirements for banks on the world. In it bank regulators amazingly decreed the risk weight of the sovereign, meaning the government, was to be zero percent, while that of the private sector was set at 100 percent.

From that moment on, banks of G10 would be able to leverage their equity more with loans to the sovereign than when lending to the private sector. And that meant banks would earn higher expected risk adjusted returns on equity when lending to the government than when lending to the “risky” private sector. Of course, implicitly it also meant that regulators believe that governments could use bank credit more efficiently than the private sector. In other words an expression of statist sadism!

That translated into a non-transparent subsidy for the government, just another different type of tax revenue, payable by all the extra interest rates or lesser access to bank credit the private sector would have as a result of it.

How much would that tax be? It is hard to say but, if we consider that the most important part of its cost is the foregone opportunities of fair access of bank credit to SMEs and entrepreneurs, then we could be talking about some truly mindboggling amounts.

Sir, would you ask Tim Harford whether he, as an economist, has any opinion about taxes disguised as regulations?

PS. That subsidy also implies that the usual proxy for risk-free rates, like US Treasury, now indicates a subsidized risk free rate

November 20, 2015

Sir, commenting on “Bank of England’s damning report on the 2008 failure of HBOS — seven years since the financial crisis” you write: “A [drawback] is that the regulators themselves — and the politicians who established the “light touch” regulatory regime for the City of London that encouraged the HBOS failure — do not face similar action… Meanwhile, the FSA, which was supposed to ensure that the UK’s biggest banks did not run aground and put the taxpayer at risk, was broadly deficient in its job. It operated within the prevailing political assumption of the time that the FSA “had to be ‘light touch’ in its approach and mindful of the UK’s competitive position”, “Better late then never for banking discipline”, November 20.

I have explained it to you and your columnists and reporters a thousand of times, in hundreds of different ways, and so here comes a reprise of some of my arguments:

Bank capital is to be a buffer against unexpected losses. To base them on expected credit losses does not make any sense.

Any risk, like credit risk, even if perfectly perceived, causes the wrong actions if excessively considered.

All major bank crises have resulted from excessive exposures to assets perceived ex ante as safe, never from excessive exposures to what was perceived as risky.

To allow banks to hold less capital against some assets allow the banks to earn higher risk adjusted returns on equity on these. And that distorts the allocation of bank credit to the real economy.

To allow some banks to use their own risk models to determine the capital requirements is like allowing kids decide how much ice cream and chocolate to eat that leaves out the spinach and the broccoli.

Without these regulations banks would never ever have been allowed to leverage as much as they did.

To regulate banks without considering their purpose, like allocating bank credit efficiently to the real economy, is utterly irresponsible.

To allow some few credit rating agencies to have such importance for the capital banks needed to hold was to invite systemic risk.

Sir, it was clear that with this piece of regulations banks would dangerously overpopulate safe havens and, equally dangerous for the real economy, underexplore risky, but potentially very rewarding, bays. And that is what happened, and still you have difficulties of seeing it, I do not understand why. Is the difference between ex ante risks and ex post realities too much to handle?

Not understand the role of risk-taking in keeping the economy moving forward so as not to stall and fall, shows lack of vision and wisdom.

And you know I could go on and on.

You write: “By naming [some] who ran HBOS “without due regard to basic standards of banking” and recommending that several face possible bans from working in the industry, it clarifies responsibility.

I wish that would be valid for failed bank regulators too. Most of them have been promoted and are busy hiding or ignoring their own responsibilities.

November 19, 2015

You write: “Chavismo once saw itself as a global revolutionary force.” Absolutely but there were way too many around the world that supported that view.

You write: “Today, incompetence and corruption have revealed it to be merely a cynical charade.” Absolutely, but it is also a cynical charade to believe that a country, in which its government receives 97 percent of all abundant exports will not, sooner or later, embrace incompetence and corruption.

November 18, 2015

Sir, Martin Wolf writes: “Because corporations are responsible for such a large share of investment, they are also, in aggregate, the largest users of available savings”. And he lashes out at corporations for not doing enough investments. “The corporate contribution to the savings glut” November 18.

Yes, corporations are the largest users of available savings, but that does not mean they are those who move the investments on the margin. Those most important, on the margin investors, are those tough risky risk-takers we need to get going when the going gets tough. And those are the ones who have their fair access to bank credit blocked by the credit risk weighted capital requirements for banks… since banks will always preferentially access to assets against which it has to put the least of its own equity for… especially in times of scarce regulatory bank capital.

I know that Martin Wolf does not understand or does not want to admit the distortions in the allocation of bank credit that credit-risk weighting regulation does, but that does not make it one iota less distortive.

PS. Amazing. Martin Wolf even suggests we should think about taxing retained earnings to force corporations to invest and not of getting rid of those regulations that block the access to bank credit for investments. Much of that corporate cash is in banks and in the unproductive "safe havens"

There might not be clarity about the “how they do so” but there is no doubt about the why they do so. It is to lower the equity requirements, so that they can earn as high as possible expected risk-adjusted returns on assets. Just like kids would promote the nutritional value of ice cream and chocolate cake and negate steadfastly that of broccoli and spinach.

Of course the return on equity ROE is one of the most important measures they are and good luck to anyone trying to raise capital saying it isn’t so. Oliver Ralph is perfectly clear when stating “Ignore it at your peril”.

Bank ROE has of course mutated as an information tool. Nowadays it is very difficult to establish how much of it is produced from real banking… how much from over-leveraging banking, and how much from pitifully bad risk weightings.

Suffice to see the zero percent risk weights for sovereigns. Those sovereigns who in our face announce inflation targets so that can repay us with currency worth less… those which already mention the need of increasing taxes in order to repay their debts.

We read “European rules, known as Mifid 2, will reshape the way analysts report on companies and how the research can be priced and circulated to investors… going from quantity to quality… banks to become more selective in the sectors they deal within an environment where clients will no longer support the 60-70 research teams that cover each major European industry… number of analysts publishing Emea research for the 12 top banks fell 17 per cent from 2007 to 2014.”

What are these busybody regulators doing? Don’t they understand what systemic risk is all about? And now they are pushing for Systemic Important Research Institutions, SIRIs.

Don’t they understand that going from quantity to quality often just entails going from the open market into even less transparent small mutual admiration clubs? Did they not learn about the systemic risks of giving information power to few like when they gave it to the credit rating agencies?

Quality? Quality is a result of the diversity that includes many “un-qualified” players but who could suddenly bring forward fresh perspectives, or be making those insolent questions required for having a chance at sustainable quality.

Did they not do enough damage to financial research when they subordinated the importance for banks of getting the risk premiums right, to getting the equity required low?

The more I read about what arrogant and hubristic regulators are up to, the more I feel we have to put faith in shadow organizations to be able to help our grandchildren to a livable future.

November 14, 2015

Sir, Tim Harford writes about when recalling a flight taken after “watching the Twin Towers of the World Trade Center collapse on television”, he was “in a state of mortal fear”, but how that fear seems so foolish to him now. And that’s because “each year an American citizen has a one in 9,000 chance of dying in a motor vehicle accident, and… Even in 2001, the chance of an American being killed by a terrorist was less than one in 100,000”, “Nothing to fear but fear itself?” November 14.

Harford then argues: “Perhaps the true impact of terrorism is psychological… The terrorists’ best hope lies in provoking and overreaction. Too often they succeed”

Absolutely. And the question then is: What terrorism impacted our current bank regulators into believing so much that those who are perceived a risky credits cause more damage to our banks, than those who perceived as safe can turn out to be very risky?

The worst part of that belief is that seemingly it is not as transitory as Harford argues fear to more normal terrorism to be. Today, years after the explosion of what was considered safe by regulators, like AAA rated securities and loans to Greece, we still have much higher capital requirements for banks against what is perceived as risky than against what is perceived as safe.

He sure has a point and perhaps we should measure economic growth on a per capita basis.

In the same vein, may I express doubts on whether we should use the term recession when the decreasing economic growth is a direct consequence of calling it quits… meaning not wanting to risk what we already got in order to get anything better.

Because, calling it quits that is what bank regulators did, when they allowed banks to earn higher risk adjusted returns on what is perceived ex ante as safe, than on what is perceived as risky.

I mean should there not be a difference between an unwanted recession and a recession that results from prioritizing other wishes?

Most current “recessions” are not unexpected consequences they are the natural results of someone meddling with the markets.

November 13, 2015

Absolutely! I totally agree: “there is zero evidence that these central bankers have superior knowledge, obvious that they have no superior insight into the future, and dubious that they command superior virtue.”

Anyone thinking that by distorting the allocation of bank credit in favor of those perceived as ex ante as safe, and which discriminates against the fair access to bank credit of those perceived as risky, will make the bank system safer, has not the slightest idea about what he is doing.

Not only are bank crises always the result of excessive exposures to what is perceived as safe but turn out to be risky; but also the strength of the real economy is a direct function of banks lending intelligently to those perceived as risky, like to its SMEs and entrepreneurs.

Let me just name some of these failed regulators that should be held accountable: Jaime Caruana, Mario Draghi, Stefan Ingves, Alan Greenspan, Ben Bernanke and Mark Carney.

Sir, Barack Obama writes “the US is ready to lead a global effort on behalf of new jobs, stronger growth, and lasting prosperity for all our people well into the 21st century. “America’s bold voice cannot be the only one” November 13.

He mentions: 1. “fiscal policy that supports short-term demand and invests in our future”; 2. “boost demand by putting more money into the pockets of middle-class consumers who drive growth”; 3. “more inclusive growth by lowering barriers to entering the labour force.” 4. “high-standard trade agreements that actually benefit the middle class” 5. “greater public investment… through new private investment in clean energy.”

Nowhere does he make a reference to the need of getting rid of bank regulations that are blocking the risk-taking needed to achieve sustainable economic growth.

The pillar of current bank regulations is the credit-risk weighted capital requirements for banks; more risk, more capital -less risk, less capital. Since banks, when deciding on risk premiums and amounts of exposure, already clears for credit risk, this results in an excessive consideration of credit risk. Any risk, even though perfectly perceived leads to the wrong results if excessively considered.

And therefore, in words attributed to Mark Twain, we now have banks that lend you the umbrella, much faster than usual if the sun is out, and take it away, much faster than usual if it seems like it could rain. In other words our bank’s, by having been given permissions to leverage much more with what is perceived as safe, earn much higher risk-adjusted returns on equity when lending to the safe are, consequentially, behaving more risk-averse than ever.

If one wants banks to be constructively bold, then one should set the capital requirements based, not on pitiful credit risk weights, but on daring purpose weights, like for instance based on “clean energy” and job-creation ratings, and SDGs in general.

And this will not cause the banking sector to become unstable, just the opposite. Never ever are major bank crisis the result of excessive exposures to something perceived as risky when placed on the balance sheets of banks… only of something ex ante perceived as safe that ex post turns out risky.

PS. This is also a civil rights issue. These regulations that double down on credit risk, discriminate against the rights of the risky, like SMEs and entrepreneurs, to have fair access to bank credit.

November 12, 2015

Sir, Francisco Rodriguez, the chief Andean economist at BofA Merrill Lynch Global Research, one who provides investors with advice on whether to lend to Venezuela or not, one who has often recommended financing the Bolivarian Revolution, because the interest rates were attractive, writes that Venezuela’s “system could work very well when commodities prices (oil) were on the upswing but became problematic when oil prices started declining” "Lessons from Venezuela at a time of economic unease”, November 12.

The solution Rodriguez suggests, not only for the current government but also for “the country’s opposition if it manages to reach power”, “is probably to be found in a mixture of institutions that gives broad authority to the executive branch to make economic adjustments when these are necessary, but places effective limits on its political authority through a strong and autonomous judiciary and other bodies to hold power to account”.

As if that is possible in a country in which the government is the recipient of over 97 percent of the nations exports.

If in Britain the monarchy received over 97 percent of that nations exports, would you be arguing strengthening the institutions, or getting those revenues out of the governments hands and into the hand of British citizens?

Let me assure you that in Venezuela when oil prices are on the upswing, we citizens become less and less relevant to the governments; in fact we turn into a nuisance to them.

Now when oil revenues and borrowing capacity is dropping dramatically, the Government might even need all those young Venezuelans who they forced to migrate in order for them to have a chance of a better future.

There is but one way to give our nation a chance for a sustainable better tomorrow, and that is distributing all the net oil revenues among all the Venezuelans; and so that governments serve us instead of serving themselves.

PS. I am supposing that the title was placed by FT. We Venezuelans all know that the tragedy our country is facing goes worlds beyond "an economic unease"

Sir, John Reed writes that combining traditional banking and investment banking into a universal banking is inherently unstable and an unworkable model “Our universal banking mistake”, November 12.

Reed argues: “Mixing incompatible cultures… make the entire finance industry more fragile…Traditional bankers tend to be extroverts, sociable people who are focused on longer term relationships. They are, in many important respects, risk averse. Investment bankers and their traders are more short termist. They are comfortable with, and many even seek out, risk and are more focused on immediate reward. In addition, investment banking organisations tend to organise and focus on products rather than customers. This creates fundamental differences in values.”

Reed might have a point, but, in my opinion, the main reason for the system being fragile is because regulators treat the different activities differently. With the credit-risk weighted capital requirements for banks, some are allowed to leverage their activities much more on equity than others. That introduces distortions that are impossible to clear for.

Apply one single capital requirement for all assets, for instance 8 percent, and the leveling of the internal playing field would strengthen the system and help to drive out many of those cultural differences.

PS. Could farmers and the cowboys be friends, if treated so differently?

November 11, 2015

Sir, Martin Wolf writes that if that if “hysteresis” — the impact of past experience on subsequent performances” is the cause for the economy failing to recover its “Possible causes [could] include: the effect of prolonged joblessness on employability; slowdowns in investment; declines in the capacity of the financial sector to support innovation; and a pervasive loss of animal spirits” “In the long shadow of the Great Recession” November 11.

For more than a decade I have tried to explain for Mr. Wolf that, if you allow banks to hold less capital against assets that ex ante are perceived as safe than against assets perceived as risky, you allow banks to make higher expected risk adjusted returns on equity on safe assets than on risky, and that of course will decline the willingness of the financial sector to support innovation and erodes the animal spirit. When banks make the good returns on equity, on for instance financing houses, why on earth should they go an finance what requires them to hold more capital and is therefore harder to achieve good ROEs for?

But Martin Wolf, and FT, has never wanted to accept that as a serious source of distortion in the allocation of bank credit. I have never understood why. I dare him, or FT, or any bank regulator for that matter, to a public debate of that issue… come on, show us some of the “without fear”

Thomas Hoenig the Vice Chairman of FDIC has recently said: “Using simple leverage measures instead of risk-based capital measures eliminates relying on the best guesses of financial regulators to guide decisions.” I pray he is able to convince his colleagues of that. The world has had more than enough of that reverse mortgage regulators imposed and that makes banks finance more the safer past than the riskier future.

When I think of those millions of young people who will never get a chance of jobs that help them fulfill dreams, thanks to these hubristic and outright incapable regulators, I get so sad and mad.

November 09, 2015

Sir, Ferdinando Giugliano, Sam Fleming and Claire Jones write: “Mr Draghi is adamant that rules, not politics, have dictated its approach to Greece and other member states.” “Peak Independence?” November 9.

Thomas Hoenig’s the vice chairman of FDIC in a speech delivered on November 5 stated: “Some sources of risk undoubtedly have been fed by current regulations designed to direct banks’ activities in accordance with regulators’ views. For example, banks levered up on sovereign debt of nations such as Greece due to the zero risk-weighting given by “risk-based” rules.”

Clearly FDIC’s vice chairman agrees with what I have been saying for years, namely that it was the Basel Committee, and their associates, who did Greece in.

Mario Draghi the now President of the European Central Bank and the former chairman of the Financial Stability Board, should never have been placed in a position where he could try to cover up for his participation in the mistakes that brought Greece down.

As is the fatal credit risk weighted capital requirements for banks still conspire against all Greek SMEs and entrepreneurs having fair access to bank credit, in order to help their land crawl out of the hole its in.

PS. When I think about all those “risky” who because of regulators have not had fair access to bank credit in order to try to create the new jobs the new generation need… I get so… sad/mad

November 08, 2015

Sir, Tim Harford discusses several experiments on how wishful thinking can influence the outcome. In most of these the sufferer of wishful thinking consequences is the wishful thinking himself. But, when Harford mentions: “Perhaps a belligerent politician or union leader would find his or her position strengthened by a strike. A general might desire a war. Lawyers might profit from urging their clients to go to court.” he is clearly referring to bad wishful thinking, “When wishful thinking becomes wasteful”, November 7.

So let me ask? How wishful was it not of regulators to think that by interfering with some capital requirements based on credit risk they could stop banks from failing without distorting the allocation of bank credit to the real economy? Or, if it was not wishful thinking, was it pure dumb unforgivably irresponsible thinking?

How wishful was it not of regulators to think that they did not need to look back at history to see what caused bank crises because it sufficed to look at the ex ante perceived credit risk of the assets? Or, if it was not wishful thinking, was it pure dumb unforgivably irresponsible thinking?

How wishful was it not for regulators to think they could empower some very few human fallible credit rating agencies, to decide how much capital banks needed to hold, and that these were not going to be captured? Or, if it was not wishful thinking, was it pure dumb unforgivably irresponsible thinking?

Whenever the concept of wishful thinking might be used to sort of make unpardonable dumb thinking more socially acceptable, I have a problem with it.

Again there is that reference to “unintended consequence” which seems always ready to serve as an excuse for any kind of dumb and mindless interfering. An example:

Never have bank crises resulted from lending out too many umbrellas when it rained, they have all resulted from lending out too many umbrellas when the sun was shining radiantly.

But nevertheless bank regulators decided that, in order to make banks safe, they had to give them even more incentives to lend out the umbrella when the sun shines and to take it back hurriedly when it looked that it might rain. And so they imposed credit-risk weighted capital requirements for banks; more risk more capital – less risk less capital.

And of course the result was excessive bank exposures to what was perceived as safe, this time aggravated by banks holding specially little capital against it… was that an unexpected consequence?

And of course the result is excessive few bank exposures to what is perceived as risky, like SMEs and entrepreneurs, something very dangerous for the real economy… is that also an unintended consequence.

And then the regulators decided that a few human fallible credit rating agencies were going to decide on the riskiness of credits.

In January 2003, in a letter published in the Financial Times I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”

And yet many present the ensuing disaster with the AAA rated securities backed with mortgages to the subprime sector in the US as an “unintended consequence”. Have they no shame? Are we so dumb we allow them to get away with that?

Sir, John Authers writes: “That so many public companies are choosing to pay out cash rather than reinvest it is therefore disquieting… Companies are getting less cash than they used to, they are not optimistic that they can invest it productively and so they are choosing to deploy it in a way that weakens the chances of sales growth in the future. Not encouraging.” “Follow the cash trail for clues to the growth outlook of companies” November 7.

Disquieting indeed but is it so much worse. Public companies, though many will surely and hopefully be around for many decades or even centuries, do still represent the old economy. The new economy, that is to be born out of the efforts of new entrepreneurs and SMEs, those who might yet not even be dreaming about a public level.

And so that bank regulators, by requiring higher capital requirements when lending to the risky new than when lending to the safer old, hinders the nascent new economy fair access to bank credit, is truly tragic and unpardonable.

When have bank crises resulted from many seeds failing to germinate? These have all resulted from what was thought of as solid trees suddenly falling down. The Basel Committee is treating new grass as bad weed.

November 06, 2015

Sir, Andrew McAfee, gives us his take on the tragedy that “Lots of the traditional jobs for these people are disappearing in the rich world, and wages for remaining workers are pretty stagnant… and the middle class is being hollowed out in country after country” “Boredom and vice can be deadly in a life without work” November 6

And I hold that is in much the result of bank regulators giving an overriding importance to banks avoiding credit risk and not caring one iota about any other purpose of our banks.

And Sir, by silencing me, you fully support those absolutely inept regulators. The truth will catch up on you… on the web I have already over 2.000 letters to you on that subject and which you have ignored, because you so mono-thematically cannot accept the idea of technocrats having been so mistaken.

Not long ago, one of your famous columnist replied to one of my letters with the following:

“IT IS NOT TRUE that risk-weighting is the only reason for the crisis… To argue that it is implies, as I have told you, that allowing banks to make certain loans compels them to do so. But there is no such coercion: if the risks are high, they should not, in their own interest, make the loans. Nor is it the case that risk-weighting prevented banks from lending to small enterprises. The reason that they did not (and do not) do so is that it IS ACTUALLY risky to do so, relative to the perceived return.”

You see, evidently your columnist does not understand that if you can leverage your risk adjusted return much more when lending to the safe, and thereby obtain a much higher relative risk adjusted return on equity when lending to the safe, you will simply not lend to the risky, like to the SMEs and entrepreneurs.

Or let's put it this way. Two borrowers with exactly the same risk profile. To one the bank is allowed to lend leveraging 12 to 1, to the other 30 to 1. Who do you think the bank is going to lend to the most and the cheapest?

Or let's put it this way. Two borrowers with different risk profiles, but offering the same risk and cost adjusted margins. To one the bank is allowed to lend leveraging 12 to 1, to the other 30 to 1. Who do you think the bank is going to lend to the most and the cheapest?

Sir, do you want me to arrange a Finance 101 for your columnists and reporters?

My conclusion is that were I 40 and some years younger, about to start working and thinking about a family, I would not be looking with kind eyes on the inactivity that is there reflected... 25 bp up or down or no change at all.

But, if I also knew that bank regulations, by means of capital requirements, were in Mark Twain’s terms giving banks further incentives to lend the umbrella when the sun was out, and to take it away when it looked like it was going to rain, then I would really be pissed off. What do these bank regulators mean? Is the avoidance by banks of perceived credit risks, more important than my future?

“For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created]..

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent…

The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

Bank regulators do you not know that the upcoming generation is already living new economic Wild West realities, made worse by having to suffer these under the thumb of a West Coast type bank regulatory establishment?

November 05, 2015

Sir, Richard Milne at the end of his report of Volkswagen’s woes writes: VW makes about the same number of cars as Toyota – but has almost double the number of workers – 593.000 to 344.000”, I guess then that 249.000 workers would not be in total agreement with the titling of the report: “System failure” November 5. You just cannot have the cake and eat it too.

It must be quite clear that to overcome such a competitive disadvantage, VW had to resort to other means… in this case clearly not so elegant or legal means. Do I condone it? Of course not, but let's keep the debate real. The trade off between carbon emissions and jobs is very much out there in the real world.

But let us now also suppose VW was a pupil in the European Boarding School. If it had acted this way, blatantly infringing regulations during years… whom would we blame, VW or the headmaster of that school?

Or should 249.000 potential Toyota workers want Toyota bosses to cheat on the headmaster too?

Sir, David Pilling when writing about deregulation of bank interest rates opines that: “China now needs a better allocation of capital. It needs less money to be pushed into heavy industry, and more into services and innovative industries, many of them outside state control.” “Beijing cannot control babies or banks” November 5.

No Mr. Pilling, as long as China follows the dictates of the Basel Committee, as seemingly it does, that type of “better allocation” of bank credit does not exist. With the credit risk weighted capital requirements, the only real allocation, or more correct misallocation of bank credit that exists, is favoring what is perceived as safe and hindering the access to bank credit of what is perceived as risky. And of course that applies to UK too.

And Pilling also mentions: “Ending financial repression is an important step in the right direction”

No Mr. Pilling. The real financial repression, the one resulting from favoring with ultra low or no capital requirements for banks when holding assets of sovereigns, and which started in 1988 with the Basel Accord, is alive and kicking, even in your UK.

PS. What the Basel Committee has done is not much different from China trying to control babies.

And on Axel Springer’s website I found that: “Axel Springer finds the business model of ad-blocker services to be unlawful. This applies to both the blocking of advertising on publishing websites as well as to the ’whitelisting’ service, which publishers can pay for to free themselves of the advertising block, which is an extortionate approach according to Axel Springer.”

And I was left wondering… why is it unlawful to block the way into my limited attention span and not to enter into it?

So now, if we want to have access to BILD we have to accept the ads, or subscribe to it paying 2.99 Euros per month. Hold it there; is not my limited attention span worth anything?

I have figured out that I have about room for 64 30-second ads per week which makes about 256 per month. And I have decided that my using up that limited attention span should be worth about 1 Euro for any 30-second ad to me; on which I would accept to pay a 30 percent commission for managing my preferences.

And so now my calculations are: First is access to BILD worth 3 Euros per month to me, and, if so, should I pay BILD in cash, or with 3 30-seconds attention spans?

But what if BILD cheats and wants to pump more pieces of attention spans out of me?

And so here’s my proposal. BILD if you have an article I am interested in, and I read it, then I will look, with interest, at any 30 second ad you send me. And, if you sell that to a client who is sufficiently interested in me to pay me 1 Euro, you can keep 30 percent of it, in order to split it any which way you want between yourself and the writer of that article.

And then of course I am going to rank how well BILD is my interests and my need of intellectual diversity.

Current business model are based on the assumptions that we the recipients of ads have unlimited attention span and that is simply not true… you should look at my inbox even after the span filter has done its job.

I foresee throat-cutting competition for attention spans for ads, and those cutting a deal with the owners of it will come out ahead.

Sir, Martin Wolf holds that “The relentless decline in the proportion of prime-aged US adults in the labour market indicates a significant dysfunction. It deserves attention and analysis. But it also merits action.” “America’s labour market is not working” November 4.

There is a whole lot of things that do not work as we want them to work, and there are certainly many major dysfunctions causing that, and clearly not only in America.

For instance one truly major dysfunction is that our banks, those who should allocate credit as efficiently as possible to the real economy, have been awarded huge incentives, not to manage perceived credit risks, but to avoid credit risks.

That is so because even though banks consider credit risk when deciding on the size of exposures and interest rates, the regulators decided those same perceived credit risks should also determine the capital banks needed to hold. The end result of that regulatory nonsense is of course too much bank credit to what is perceived as safe, and too little to what is perceived as risky… and, among the risky, we find the SMEs and entrepreneurs, precisely those who have the best chances of delivering new jobs.

That dysfunction which started in 1988 with a major destructive tsunami known as the Basel Accord, in which the regulators amazingly set the risk weights of sovereigns to zero percent, and that of the private sector at 100 percent, has been in crescendo ever since.

The regulators have just not been able to understand that even a perfectly perceived credit risk, leads to imperfect results, if excessively considered.

But that dysfunction might be topped by an even worse dysfunction, namely that of the academia and other influential actors, like journalists, simply not daring to accept the possibility that regulators could have made such a fatal blunder, and therefore keeping silent about it.

Sir, since during the last decade I have written Martin Wolf over 250 letters about that problem, which I accept is slightly dysfunctional in its own way. But, the only time Wolf publicly acknowledged these was when in 2012 he wrote: “As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk. For this reason, unweighted leverage matters.”

And yet, even describing the argument that showed that the regulators, with their more risk more capital – less risk less capital, could be 180 degrees off mark, he left it at that.

Sir, I am sorry to say but there seems to be something very dysfunctional at FT that hinders it from living up to its motto of “Without fear and without favour”

November 03, 2015

Sir, Barney Jopson and Gregory Meyer report, “The Fed wants to use capital charges to discourage banks from risky activities involving hazardous materials that could threaten their survival in the event of a catastrophe… like costly disasters such as tanker spills or gas pipeline explosions.” “Banks face capital call for commodity disaster costs”, November 4.

With their credit risk weighted capital requirements for banks regulators already discourage banks from lending to those perceived as risky, like SMEs and entrepreneurs, now they also want to discourage lending to what could produce a gas spill or a gas explosion. Where will all this risk aversion end?

When will they realize that something perceived risky like handling hazardous materials is by definition much less risky to the banking system than something that has an AAA credit rating?

Banks should of course hold capital against unexpected losses but regulators should of course also have the intellectual capacity to understand that the really dangerous unexpected, has much greater potential to appear among what is perceived as safe, than among what is perceived as risky.

Please let us have an 8 to 10 percent capital requirement on all bank assets based on that regulators simply do not know what they do, instead of having them to distort the allocation of bank credit based on their anxiety de jour.

In these letters I have argued that the credit-risk weighted capital requirements for banks, introduce a regulatory credit-risk aversion that dangerously distorts the allocation of bank credit to the real economy. And because the risk weights are based on the intrinsic riskiness of the assets, and not on the risk for the banks of those assets, it does not help the banking system to become any safer, in fact, just the opposite.

For instance Basel II had a basic 8 percent capital requirement. That, when risk weighted 20% for what was rated AAA to AA, resulted in a 1.6 percent capital requirement, an authorized 62.5 to 1 leverage. And, when risk weighted 150 % for what had a credit rating of below BB-, it resulted in a 12 percent capital requirement, an authorized leverage of 8.3 to 1.

Sir, explain to me, what kind of analysis can justify that loans to those rated below BB-, always awarded in much smaller amounts and with much higher risk premiums, are 7.5 times riskier than huge exposures, with very low risk premiums, to what is AAA to AA rated?

When have ever those rated below BB- represented more dangers than those rated AAA and who could have a too good credit rating?

Minds capable of such regulatory nonsense should clearly not be allowed to regulate our banks… or promoted to other important posts. Bankers might quite often be dumb, but in general they are not suicidal.

Sir, the Basel Committee’s regulatory absurdity is of epical proportions. And FT’s journalistic irresponsibility ignoring that absurdity is equally of epical proportions.

PS: The capital requirement for banks when holding AAA to AA rated sovereign debt was set at zero percent in Basel I and II. If a bank held only these safe assets, with current negative interests, this would break the bank in just a few days.

November 02, 2015

Sir, setting of course aside the pay package of £8.25m a year, I would not like to be in Jes Staley shoes having to face those who when meeting him discreetly look away after having read Lucy Kellaway’s “Barclays boss needs to ditch his inexcusable focus on value”

Good for her. To reveal haughty arrogant stupidity among the powerful is the absolutely most important role journalists have.

That’s the “Without fear and without favor” spirit we expect from the Financial Times. I have sure been missing a lot of it lately.

Sir, Attracta Mooney quotes Pascal Blanqué, deputy chief executive of Amundi, stating: “QE has proved a mixed blessing. It prevented a 1929-style depression after the collapse of Lehman Brothers in 2008. But it has also delivered unintended consequences for longterm investors. The challenge for policymakers is to address them.” “QE ‘acted like an opaque tax’ on pension funds” November 2.

Again someone is speaking about unintended consequences, instead of referring to what obviously should have been expected consequences.

With QEs injecting liquidity into safe investments; with bank regulations awarding huge incentives through the capital requirements for banks to finance what is safe; with bank regulations awarding additional huge incentives through liquidity requirements for banks to hold what is safe, and with sovereign debt having been decreed as ultra-safe and assigned a zero risk weight, there can be no doubt that the financial safe havens of the world are bound to become dangerously overpopulated. Where is a widow or an orphan to take refuge nowadays… in Argentinian railroad projects?

November 01, 2015

Sir, Wolfgang Münchau refers to “the introduction of the euro [and] the EU’s enlargement to 28 members from 15 a couple of decades ago” as the “Two big mistakes that ruined Europe” November 2.

Of course that created problems. But those problems are nothing compared to what bank regulators did when they told the banks: “We allow you to make immense risk-adjusted returns on equity, as long as you finance what is safe, like the sovereigns, the housing sector and the AAArisktocracy, and stay away from financing the risky, like the SMEs and the entrepreneurs. Because that is exactly what the Basel Committee instructed with its credit-risk weighted capital requirements for banks.

The Euro and the number of EU’s members that represents tangible problems. Regulatory risk aversion is ruining a vital element of the soul of Europe.

Münchau considers EU’s “leaders are intellectually not ready” to run the world’s second-largest economy. Given that Münchau clearly does not understand the distortion in the allocation of bank credit current regulations cause, may I express some doubts about his intellectual capacity too?

Me and my constituency!

Me and my constituency!

FT, just so that you know:

Some very few regulators thinking they were capable of managing the bank risks of the world, caused and are still causing immense sufferings, and you Sir are refusing to help holding them accountable for that.

My wicked question to FT

When do banks most need capital, when the risky turn out risky, or when the "not-risky" turn out risky? --- Yep, I think so too!

Videos: The Financial Crisis

My credentials

I have more credentials than most to speak out on the financial crisis and the subprime financial regulations having spoken out loudly about that since 1997...which could be embarrassing to “experts” with weak egos.

Most of those who think of themselves so broadminded when asking for “out of the box thinking” are so very narrow-minded they can only accept what comes, if that outside box lies “within their own small networks”.

Thank you, Martin Wolf

And on July 12 2012 Wolf also wrote that when "setting bank equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk."

And that is something that I of course also appreciate, but that yet makes me curious on why Wolf does not follow up on it.

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I don’t take comments here because I might not have the time to answer (or censor) them and I hate unanswered comments, but, if you want me to comment on something somewhere else invite me and I might show up: perkurowski@gmail.com

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Off-the-blog

One great perk I get from maintaining a blog like this is that it allows me to sustain many conversations with some great journalists who also need and wish to be kept “off-the-record” or as I call it “off-the-blog”.

Yet one wonders

Between January 2003 and September 2006, out of 138 letters to the editor that I sent to the Financial Times before I placed them on this blog they published these 15. Not bad! Thank you FT!

Unfortunately, since then and until the very last day of the decade, out of some 1.000 letters that you can find here, FT published none, zero, zilch. Of course FT is under no obligation whatsoever to publish any of my letters and of course one should not exclude the possibilities that my letters might have quite dramatically gone from bad to worse… yet one wonders.

My usual suspects are:

1. Someone in FT with a delicate ego feels his or her importance diminished by giving voice to a lowly non PhD from a developing country daring to opine on many issues of developed countries.

2. That FT has some sort of conflict of interest with the credit rating agencies that makes it hard for them to give too much relevance to someone who considers they have been given too much powers.

3. The FT establishment had perhaps decided there were only macro economic problems and not any financial regulation problems, and wanted to hear no monothematic contradictions on that.

4. That FT feels slightly embarrassed when someone repeatedly asks the emperor-is-naked type question of what is the purpose of the banks and realizing this was something FT should have itself asked a long time ago.

5. It is way too much oversight for FT to handle.

6. Or am I just supposed to be a living example of one half of the Financial Times motto, namely that of "without favour"Which one do you believe is closest to the truth?

A Blog is born

I like reading The Financial Times, or FT as it is known, and I frequently write letters to the editor and some of them that have indeed been kindly published, for which I feel thankful. But then I realized that all those letters to the editor that for reasons impossible for me to comprehend were never published, were condemned to an eternal silence not of their own fault, and so I decided to, at a marginal cost of zero, to resurrect them and keep them alive, right here.

English is not my mother language so bear with me and you’ll probably note when my letter has been published in FT by its correctness. Swedish is my mother language but I have not written anything serious in it for about 40 years and last time I tried, they just laughed their hearts out because of my démodés. Polish is my father language but, unfortunately, I do not speak a word of Polish, much less write it. Yes Spanish is my language, as I am from Venezuela and although I trust I write in it with great flair, I would still never dream of publishing an article in Spanish without having it edited by my wife.

And so friends here is my Tea with FT blog with my old and new letters to the editor. I hope you will share them with me now and again, and then again and again.

Welcome, and cheers, as I believe they say over there.

Per

PS. Just so that FT does not get too cocky and believe it is my only window to the world, I will now and again publish a letter sent to the editor of another publication.